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How to Make Money with Bitcoin: 5 Steps to Financial Freedom
Bitcoin is an elusive topic of conversation with many who believe it is and can only be used in one fashion or another. However it is created to be versatile with multiple ways to spend and earn. So apart from buying Bitcoin straight off the market what can you do to learn how to make money with Bitcoin?
In this article, IncomeNinjas will show you 5 ways of how to make money with Bitcoin and how easy it is to get started today.
Selling goods and services
Faucets, microtasks, ads
Writing about Bitcoin
Sell Goods and Services
Selling goods and services in exchange for Bitcoin is the original intent for creating cryptocurrency and how many people make money online.
Why not sell your creations, pre-loved books or services online and pay with Bitcoin? It’s just one small change from what we already do on Etsy, Amazon or Craigslist. Some are already accepting Bitcoin as a form of payment so why not use this as an effective way of how to make money with Bitcoin!
If you are looking to make additional income and are interested in receiving payments from buying customers with Bitcoin, there are sites that will help you list and sell to potential customers. You want to know how to make money with Bitcoin by selling products? Online markets like Bitify and Purse.io can help you! You can purchase or sell anything from electronics to books or even creations of your own. Much like Etsy and Amazon except with the option to conduct transactions with Bitcoin. This is also a great way to learn how to work from home.
Looking to offer your expertise as a service in exchange for Bitcoin? You can do that too. How to make money with Bitcoin isn’t uncommon for freelancers. In fact, why wouldn’t it be entirely legitimate to be hired and paid in Bitcoin. You can use websites like Upwork or Freelancer.com to get paid in fiat currency or you can use websites like BitGigs and Coinality to get paid and grow your Bitcoin wallet!
There isn’t any reason why traditional methods of buy and sell can’t be used as a way how to make money with Bitcoin. It is, in fact, one of the most effective methods on how to make money with Bitcoin and can have the highest return yield.
What Is Bitcoin?
How this digital currency works and why it’s so controversial
Bitcoin is a virtual currency that gained recognition after its price-per-coin rose above $13,000 in early 2020. The cryptocurrency (one of many) is at the center of a complex intersection of privacy, banking regulations, and technological innovation. Today, some retailers accept bitcoin, while in other jurisdictions, bitcoin is illegal.
Cryptocurrencies are lines of computer code that hold monetary value. These lines of code are created by electricity and high-performance computers.
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Cryptocurrency is also known as digital currency. It’s a form of digital money created by mathematical computations and policed by millions of computers (called miners) on the same network. Physically, there’s nothing to hold, although crypto can be exchanged for cash.
Crypto comes from the word cryptography, which is the process used to protect the transactions that send the lines of code for purchases. Cryptography also controls the creation of new coins. Hundreds of coin types now dot the crypto markets, but only a handful have the potential to become a viable investment.
Governments have no control over the creation of cryptocurrencies, which is what initially made them so popular. Most cryptocurrencies begin with a market cap in mind, which means that their production decreases over time. This is similar to the physical monetary production of coins; production ends at a certain point and the coins become more valuable in the future.
What Are Bitcoins?
Bitcoin was the first popular cryptocurrency. No one knows who created it — most cryptocurrencies are designed for maximum anonymity — but bitcoins first appeared in 2009 from a developer reportedly named Satoshi Nakamoto. He has since disappeared and left behind a bitcoin fortune.
Because bitcoin was the first major cryptocurrency, all digital currencies created since then are called altcoins, or alternative coins. Litecoin, Peercoin, Feathercoin, Ethereum, and hundreds of other coins are all altcoins because they are not bitcoin.
One of the advantages of bitcoin is that it can be stored offline on local hardware, such as a secure hard drive. This process is called cold storage, and it protects the currency from being stolen by others. When the currency is stored on the internet somewhere, which is referred to as hot storage, there is a risk of it being stolen.
On the flip side, if a person loses access to the hardware that contains the bitcoins, the currency is gone forever. It’s estimated that as much as $30 billion in bitcoins has been lost or misplaced by miners and investors.
Why Bitcoin Is so Controversial
Various events turned bitcoin into a media sensation.
From 2020 to 2020, criminal traders made bitcoins famous by buying them in batches of millions of dollars so they could move money outside of the eyes of law enforcement and tax collectors. Subsequently, the value of bitcoins skyrocketed.
Scams, too, are very real in the cryptocurrency world. Naive and savvy investors alike can lose hundreds or thousands of dollars to scams.
Bitcoins and altcoins are controversial because they take the power of issuing money away from central banks and give it to the general public. Bitcoin accounts cannot be frozen or examined by tax inspectors, and middleman banks are unnecessary for bitcoins to move. Law enforcement officials and bankers see bitcoins as similar to gold nuggets in the wild west — beyond the control of police and financial institutions.
How Bitcoins Work
Bitcoins are completely virtual coins designed to be self-contained for their value, with no need for banks to move and store the money. Once bitcoins are owned by a person, they behave like physical gold coins. They possess value and trade just as if they were nuggets of gold. Bitcoins can be used to purchase goods and services online with businesses that accept them or can be tucked away in the hope that their value increases over time.
Bitcoins are traded from one personal wallet to another. A wallet is a small personal database that is stored on a computer drive, smartphone, tablet, or in the cloud.
Bitcoins are forgery-resistant because multiple computers, called nodes, on the network must confirm the validity of every transaction. It is so computationally intensive to create a bitcoin that it isn’t financially worth it for counterfeiters to manipulate the system.
Bitcoin Values and Regulations
A single bitcoin varies in value daily. Check places like Coindesk to see current par rates. There’s more than $2 billion worth of bitcoins in existence. Bitcoins will stop being created when the total number reaches 21 billion coins, which is estimated to be sometime around the year 2040. By 2020, more than half of those bitcoins had been created.
Bitcoin currency is completely unregulated and completely decentralized. The currency is self-contained and uncollateralized, meaning there’s no precious metal behind the bitcoins. The value of each bitcoin resides within the bitcoin itself.
Bitcoins are stewarded by miners, the network of people who contribute their personal computer resources to the bitcoin network. Miners act as ledger keepers and auditors for all bitcoin transactions. Miners are paid for their accounting work by earning new bitcoins for the amount of resources they contribute to the network.
How Bitcoins Are Tracked
A bitcoin holds a simple data ledger file called a blockchain. Each blockchain is unique to each user and the user’s personal bitcoin wallet.
All bitcoin transactions are logged and made available in a public ledger, which ensures their authenticity and prevents fraud. This process prevents transactions from being duplicated and people from copying bitcoins.
While every bitcoin records the digital address of every wallet it touches, the bitcoin system does not record the names of the people who own wallets. In practical terms, this means that every bitcoin transaction is digitally confirmed but is completely anonymous at the same time.
So, although people cannot easily see the personal identity or the details of the transaction, they can see the verified financial history of a bitcoin wallet. This is a good thing, as a public history adds transparency and security to every transaction.
Banking or Other Fees to Use Bitcoins
There are small fees to use bitcoins, which are paid to three groups of bitcoin services:
- Servers (nodes) that support the network of miners
- Online exchanges that convert bitcoins into dollars
- Mining pools
The owners of some server nodes charge one-time transaction fees of a few cents every time money is sent across their nodes, and online exchanges similarly charge when bitcoins are cashed in for dollars or euros. Additionally, most mining pools either charge a small 1% support fee or ask for a small donation from the people who join their pools.
While there are nominal costs to use bitcoin, the transaction fees and mining pool donations are cheaper than conventional banking or wire transfer fees.
Bitcoin Production Facts
Bitcoin mining involves commanding a home computer to work around the clock to solve proof-of-work problems (computationally intensive math problems). Each bitcoin math problem has a set of possible 64-digit solutions. A desktop computer, if it works nonstop, might be able to solve one bitcoin problem in two to three days, however, it might take longer.
A single personal computer that mines bitcoins may earn 50 cents to 75 cents per day, minus electricity costs. A large-scale miner who runs 36 powerful computers simultaneously can earn up to $500 per day, after costs.
A small-scale miner with a single consumer-grade computer may spend more on electricity than they will earn mining bitcoins. Bitcoin mining is profitable only for those who run multiple computers with high-performance video processing cards and who join a group of miners to combine hardware power.
This prohibitive hardware requirement is one of the biggest security measures that deter people from trying to manipulate the bitcoin system.
People who take reasonable precautions are safe from having their personal bitcoin caches stolen by hackers.
There are two main security vulnerabilities when it comes to bitcoin:
- A stolen or hacked password of the online cloud bitcoin account (such as Coinbase)
- The loss, theft, or destruction of the hard drive where the bitcoins are stored
More than hacker intrusion, the real loss risk with bitcoin revolves around not backing up a wallet with a fail-safe copy. There is an important .dat file that is updated every time bitcoins are received or sent, so this .dat file should be copied and stored as a duplicate backup every day.
The public collapse of the Mt. Gox bitcoin exchange service was not due to any weakness in the bitcoin system. Rather, the organization collapsed because of mismanagement and the company’s unwillingness to invest in appropriate security measures. Mt. Gox had a large bank with no security guards.
Abuse of Bitcoins
There are three known ways that bitcoin currency can be abused:
Technical Weakness: Time Delay in Confirmation
Bitcoins can be double-spent in some rare instances during the confirmation interval. Because bitcoins travel peer-to-peer, it takes several seconds for a transaction to be confirmed across the P2P computers. During these few seconds, a dishonest person who employs fast clicking can submit a second payment of the same bitcoins to a different recipient.
While the system eventually catches the double-spending and negates the dishonest second transaction, if the second recipient transfers goods to the dishonest buyer before receiving confirmation of the dishonest transaction, then the second recipient loses the payment and the goods.
Human Dishonesty: Pool Organizers Taking Unfair Share Slices
Because bitcoin mining is best achieved through pooling (joining a group of thousands of other miners), the organizers of each pool choose how to divide bitcoins that are discovered. Bitcoin mining pool organizers can dishonestly take more bitcoin mining shares for themselves.
Human Mismanagement: Online Exchanges
With Mt. Gox as the biggest example, the people running unregulated online exchanges that trade cash for bitcoins can be dishonest or incompetent. This is similar to Fannie Mae and Freddie Mac investment banks going under because of human dishonesty and incompetence. The only difference is that conventional banking losses are partially insured for the bank users, while bitcoin exchanges have no insurance coverage for users.
Three Reasons Why Bitcoins Are Such a Big Deal
There is a lot of controversy around bitcoins.
Not Created by a Central Bank or Regulated by Any Government
Banks don’t log money movement, and government tax agencies and police cannot track the money. This may change, as unregulated money is a threat to government control, taxation, and policing. Bitcoins have become a tool for contraband trade and money laundering because of the lack of government oversight. The value of bitcoins skyrocketed in the past because wealthy criminals purchased bitcoins in large volumes. Because there is no regulation, people can lose out as a miner or investor.
Bitcoins Completely Bypass Banks
Bitcoins are transferred through a peer-to-peer network between individuals, with no middleman bank to take a slice. Bitcoin wallets cannot be seized or frozen or audited by banks and law enforcement. Bitcoin wallets cannot have spending and withdrawal limits imposed on them. Nobody but the owner of the bitcoin wallet decides how the wealth is managed.
Bitcoin Transactions Are Irreversible
Conventional payment methods such as a credit card charge, bank draft, personal check, or wire transfer benefit from being insured and reversible by the banks involved. In the case of bitcoins, every time bitcoins change hands and change wallets, the result is final. Simultaneously, there is no insurance protection for a bitcoin wallet. If a wallet’s hard drive data or the wallet password is lost, the wallet’s contents are gone forever.
How to make money with Bitcoin
Have you been wondering how to make money with bitcoin and the best ways to achieve that? In this article we will try to help you.
There are so many popular ways of earning money with bitcoin. Bitcoin is a new currency created in 2009. With Bitcoin, there are no middlemen, meaning no banks! No need of mentioning your real name and no transaction fees are charged. We are going to discuss 6 of the most popular ways of how to make money with bitcoin.
Table of Contents
Top ways to make money with Bitcoin
Here are the best ways to make money with Bitcoin
Trading your bitcoins
Bitcoin trading simply involves buying and selling of bitcoin. You buy bitcoin when it is low and sell it when the price is up. This is done with the help of brokers. Brokers are applications in companies that act as middlemen in the transaction. There are many market instruments offered by the brokers; you can learn and master how to trade your bitcoins in the comfort of your living room. Making money trading bitcoins only require you to open an account with the brokers then you are set to earn more money or even more bitcoin.
If you are lucky, you can make some money. Maybe you are familiar with online casinos, you can try. The easy quick and straightforward, is to play a game you are familiar with and earn some money. It may not be the best way of earning bitcoins, but it has been proven to be the one of ‘fastest’ ways if you are good at it. You can earn a thousand of bitcoins just from hundreds at your favorite casino with live dealers in the comfort of your room.
Invest your bitcoins and make more
Apart from trading your Bitcoins, you can invest them by saving in bitcoins saving accounts. There are companies which let you open accounts and save your Bitcoins. With such investments, your bitcoins will not only increase in their value, but you will also earn more with your dormant coins.
Freelance to earn bitcoins
If you got some skills you could trade them for bitcoin, for instance, you could write for blogs or websites especially the new ones in exchange for bitcoins. Depending on how professional you are, and how skilled you are you can earn hundreds of bitcoin for your skills. You will be amazed how many people online are wiling to offer you bitcoin for a task.
A Bitcoin faucet is a website that gives away small amounts of bitcoins to its users, in turn, the owners make money by putting ads on their websites and pay people who visit their websites to see the ads and do complete surveys. This kind of industry sums up to 50% of the traffic of bitcoin websites today. In faucets, once you invite someone to their website you earn some Bitcoins. Some of the popular bitcoin faucets include: FreeBitcoin, Cointiply, Moonbit and more.
Mine your bitcoins
Bitcoin is not like paper money were producing more into circulation only lands in the hands of the Central Bank. Bitcoin can also be mined by everybody; this means that you have the control of creating money on your own through mining which entails high configuration computers and software that are specialized. Mining of bitcoin is a simple act of using a particular software in solving complex and hard mathematical problems to be paid a certain amount of Bitcoin for each task. You can also choose to mine the Bitcoin yourself. However, it become expensive as Bitcoin value continue to grow and cost of electricity rises as well. Cloud mining, on the other hand, offers a chance to those who can’t afford to run this software on specialized hardware by themselves.
Thank you for reading and feel free leave your comments. We hope we have been able to answer your question of “how to make money with bitcoin”
What Is a Bitcoin and How Does Bitcoin Work?
The questions that were on everybody’s minds at least once in 2020: what is a Bitcoin and how does Bitcoin work?
Bitcoin is made up of two words, ‘Bit’ & ‘Coin’. If you cut the information inside computers into smaller pieces, you will find 1s and 0s. These are called bits. You already know about coins.
…and what are Bitcoins?
Bitcoins are just the plural of Bitcoin. They are coins stored in computers. They are not physical and only exist in the digital world! That’s why Bitcoin and other cryptocurrencies are often called digital currencies.
It can seem quite confusing at first, but in this guide, I’ll make it as simple as possible — welcome to Bitcoin for dummies! By the end of the guide, even total beginners will understand what Bitcoin is, how to get Bitcoin, and how to use Bitcoin. Let’s start!
Table of Contents
How Does Bitcoin Work? Why Was Bitcoin Invented?
Let’s start with the basics…
There are three types of people in this world: the producer, the consumer, and the middleman. If you want to sell a book on Amazon, you must pay a big 40-50% fee. This is the same in almost every industry! The middleman always takes a big part of the producer’s money.
To understand what is Bitcoin, it’s important to know why it was created. Bitcoin was invented to remove one type of middleman — the banks. If you need to transfer $5000 from your country to your friend in the United Kingdom, the money must go through a bank in your country. They take a fee for processing. Once the money reaches the bank in the U.K, your friend’s bank charges a fee too.
It isn’t just the fees that are the problem, it’s the data they store. Banks store lots of private data about their customers. Many banks have been hacked over the last 10 years, which is very dangerous for the people that use banks. This is why it is important to understand how does Bitcoin work.
Unlike Bitcoin, banks can freeze/block peoples’ accounts whenever they want. They have too much control over the people that use the banks and they have abused their power. They played a big role in the financial crisis of 2008, too. Bitcoin started in 2009, just after that crisis. Many people believe that the crisis was one of the reasons for creating Bitcoin.
Who created Bitcoin? The creator of Bitcoin is unknown. The name used was Satoshi Nakamoto, but this was a fake name and nobody knows who the real creator is.
The solution was to build a system that has no single authority (like a bank). A single authority shouldn’t be given the power to control people. The banks and the governments controlled the currencies, so a new currency had to be created.
Bitcoin is the solution: it has no single authority. That means no banks, no PayPal, no government to be able to tell the bank to freeze your account. It’s great, right? The question on everybody’s mind now must be ‘how does bitcoin work?’.
How Bitcoin Works?
The creator of Bitcoin made three main concepts for Bitcoin that are essential in understanding the principles of Bitcoin:
- Supply and Demand
- Decentralized Networks
When you go to your internet browser and type in ‘www.google.com’, your computer starts a conversation with Google’s computers. Then, both computers start talking to each other and your browser shows images, buttons, etc. If Google’s servers were down for some reason, you wouldn’t be able to see these images and buttons. This is because the data is stored on a centralized network — it’s in one place.
To understand how Bitcoin works, it’s essential to understand what’s a decentralized network. In a decentralized network, the data is everywhere. If Google used a decentralized network, you would still be able to see the data, because it is everywhere and not just in one place. This means that Google would never go offline!
In World War II cryptography was used a lot. It converted radio messages into code that nobody could read. To read it, you would need to convert back to the original message. To do that, you needed a key. It was possible through mathematical formulas!
Bitcoin uses cryptography in the same way. Instead of converting radio messages, Bitcoin uses cryptography to convert transaction data. That is why Bitcoin is called a cryptocurrency. Knowing that takes you one step closer to understanding how does Bitcoin work.
Bitcoin does this using the blockchain. Bitcoin’s creator invented the blockchain technology!
Supply and Demand
Last week when John visited the bakery, only one cake was left. Four other people wanted it too. Normally, the cake only costs $2. But because 4 other people wanted the cake, he had to pay $10 for it.
This is the main concept of supply and demand: when something is limited, it has more value. The more people that want it, the more the price of it will go up. It’s the same as rare vintage cars.
Bitcoin uses this same concept. The supply of bitcoin is limited. Bitcoin is produced at a fixed rate, which will decrease over time — it halves every four years. Bitcoin has a limit of 21 million coins; once there are 21 million Bitcoins, no more Bitcoins can be created. How many Bitcoins are there at the moment? Well, currently (03.05.18), there are 16.9 million Bitcoins created. We’ve still got a long, long way to go before it reaches 21 million!
So, that answers part of “How does Bitcoin work?” but it doesn’t answer all of it. To really learn how Bitcoin works, we should move on to how the Bitcoin transactions work…
How Do Transactions Happen?
Now, let us see how these concepts work together. To record transactions, we need to put them in a database (like an Excel sheet).
This would normally be stored in one place in a centralized network. But because Bitcoin uses a decentralized network, the Bitcoin database is shared. This shared database is known as a distributed ledger and it is accessed using the blockchain. To learn more about blockchain technology and understand what are Bitcoins from the blockchain perspective better, read my Blockchain Explained guide.
To send Bitcoin to someone, you need to digitally sign a message that says, “I am sending 50 Bitcoins to Peter”. The message would be then broadcasted to all the computers in the network. They store your message on the database/ledger.
Can Someone Fake My Identity?
When you create a Bitcoin wallet (to store your Bitcoin), you receive a public key and a private key. Public keys and private keys are a set of long numbers and letters; they are like your username and password. Both are very important for truly understanding how does Bitcoin work.
People need your public key if they want to send money to you. Because it is just a set of numbers and digits, nobody needs to know your name or email address, etc. This makes Bitcoin’s users anonymous!
As for your private key, you should never let anyone see it. On the blockchain, your private key is your identity. You use your private key to access your Bitcoin. If someone sees it, they can steal all your Bitcoin — so be very careful!
So yes, technically, your identity can be faked. If someone gets your private key, they can use it to send Bitcoin from your wallet to their wallet. This is why you must keep your private key very, very safe.
Your real identity (your name, address, etc.) cannot be faked, though, because you do not need to use it to send or receive Bitcoin.
Can Someone Spend Bitcoin Twice?
Bitcoin transactions are grouped together and stored in blocks. These blocks are linked back to one another in a series. This is why it is called a blockchain.
Each transaction in the block has a public key written on it. If it is your Bitcoin, it will be your private key that is written on it. Because each block is connected to the block before it, no Bitcoin can be spent twice.
Let’s understand how does Bitcoin work with some real-life examples. If someone tried to send the same Bitcoin twice, this is what would happen:
- David sends John a Bitcoin
- The transaction is stored in a block on the blockchain
- The next day, David tries to send the same Bitcoin to someone else
- The Bitcoin transaction goes into the current block on the blockchain
- The computers running the blockchain check the last block that the Bitcoin was used in
- In the last block that the Bitcoin was used in, the transaction says that the Bitcoin was sent to John’s public key
- Because it isn’t John’s public key that is on the Bitcoin being sent into the current block, the computers running the blockchain do not let the Bitcoin be used
What If Someone Tries to Tamper the Blocks?
If someone tries to change the transaction data in one of the blocks, it will only change it on their own version, just like a Microsoft Word document that’s stored on your computer.
This is one of the key elements of how does Bitcoin work. To make the change go onto the shared database so that it’s on everybody’s version, they will need to control 51% of the computers in the network.
What If Someone Controls 51% of the Computers In the Network?
This is possible, but it is near impossible to achieve. Even if someone hacked 51% of the computers in the network (also known as nodes), there is another layer of security that gets in their way.
To add new blocks to the blockchain, they must be mined. This process is called mining because the nodes that do it are rewarded with Bitcoin — like gold miners being rewarded with gold.
In mining, the nodes must process Bitcoin transactions and verify that they are real. To do this, they must solve a mathematical problem. When the problem is solved, the block of transactions is verified, and a new block is created. Each block has a new problem and a new solution for miners to find.
The first node to solve this problem gets new Bitcoins. Mining uses a lot of electricity, so the miners need to be rewarded!
Some more real-life explanations on how to do Bitcoin work: here’s what would happen if a hacker-controlled 51% of the nodes and tried to change a block:
- The hacker will change the data in the block so that the Bitcoin was sent to his/her public key
- Because the data in the block has changed, there is a new mathematical problem and the hacker must solve it
- The electricity the hacker needs to solve the problem costs more than what the Bitcoin in the block is worth
- The hacker can continue and solve the problem but will lose money
As you can see, it’s almost pointless for a hacker to complete an attack on the blockchain. That’s why it is so secure.
What are the Advantages and Disadvantages of Bitcoin?
You should already know what most of the advantages of Bitcoin are after reading this far into the guide. However, I haven’t talked much about the disadvantages, have I? There are still some advantages I haven’t talked about too though, so let’s start with the advantages and then I’ll look at the disadvantages. Then you will fully know and be an expert on how does Bitcoin work question.
The Advantages of Bitcoin
✓ International payments are a lot faster than banks
✓ Fees are low
✓ Blockchain — near impossible to hack
✓ Decentralized — cannot be shut down at a single point ✓ Transparent — you don’t have to trust anyone
✓ Anonymous — you don’t need to use your name
✓ Powered by the community — the fees are shared instead of going to a single point (i.e. a bank or PayPal)
✓ No verification for new users — anyone can use it
No Verification for New Users: Why This is So Important
Another key element of how does Bitcoin work is that anyone anywhere in the world can send money to each other. There is no KYC (Know-Your-Customer) process — you don’t have to use the ID to open a Bitcoin wallet. With a bank, you must use your ID when you apply for an account. Because of this, hundreds of millions of people around the world do not have bank accounts. They cannot send or receive money. But now, with Bitcoin, they finally can!
International Payments: A Big Advantage
If you want to send an international payment, it will normally take 3+ days with your bank and cost you a fee of around $10-15 or more. It’s different in each country, but it’s still expensive and takes a long time.
If you send it using Bitcoin, it will only take around 10 minutes. Sometimes it takes longer (up to an hour or more), but it is still much quicker than the 3+ days that the banks take. The fee for Bitcoin changes often and the developers are trying to keep it as low as possible. At present (03.05.18), it is around an average of $1.
It is cheap because there is no middleman (banks, PayPal, etc.) to pay! This what Bitcoin is all about.
There are many advantages to Bitcoin, but there are some disadvantages too on how does Bitcoin work.
The Disadvantages of Bitcoin
✗ Mining uses lots of electricity
✗ Not as fast as other cryptocurrencies
✗ Fees change a lot
✗ Anonymous — used for crime
✗ Difficult to use — private keys, public keys, etc.
Fees and Speed: Bitcoin Is Nearly 10 Years Old
Bitcoin started in 2009, remember? Well, that’s almost 10 years ago! Since then, a lot of newer cryptocurrencies have been made that are a lot faster than Bitcoin. Also, Bitcoin’s fees have sometimes increased as high as $28!
The fees got high because the popularity of Bitcoin was too much for the Bitcoin network to deal with — there were too many people using it. This is something the Bitcoin developers are trying to improve, and so far, it seems to be working. As I said earlier, the Bitcoin fees are back down to $1!
Bitcoin Isn’t Very Easy to Use
The downside of how does Bitcoin work is that it needs private keys, public keys, opening and using a wallet, etc. It’s not very easy for people who aren’t confident about using computers. When you want to send a payment to someone, you must type a long set of numbers and letters (their public key) into your computer.
This is like when internet browsers first started — you had to type a long number into the address bar. Later, the (www.) addresses we use today replaced it. Bitcoin needs to become easy to use so that everyone in the world can use it, just like browsing the internet is.
Electricity and the Environment
As I said earlier, electricity costs for mining are high. The miners are rewarded with Bitcoin, so they are still making a profit. However, the electricity used by miners is very bad for the environment (now you know some downsides of the question about how does Bitcoin work).
Other cryptocurrencies, such as NEO and Lisk, are using a different mining system that uses much less electricity. This system is called PoS (Proof of Stake).
Remember that in Bitcoin’s system, the miner that verifies the block first is the one who is rewarded with Bitcoin? That system is called PoW (Proof of Work). It’s like a race, isn’t it?
Proof of Work
All the miners work on the same block at the same time, trying to win the race. This means that all miners are using electricity on every block that is created.
Proof of Stake
In PoS, only one miner can mine the block. When the next block is created, another miner is chosen to mine it. This way, it is only one miner using electricity on each block. That’s much cheaper and better for the environment!
Bitcoin’s Criminal Record
One of the darkest sides of how does Bitcoin work is that you don’t have to use your identity, because of that Bitcoin has been in the news a lot for being used by criminals. You might have heard of something called Silk Road. This was a market on the dark web — an anonymous part of the internet that must be opened using a special browser.
On Silk Road, you could buy lots of illegal things, and Bitcoin the currency that is used. Silk Road started in 2020 but was shut down in 2020 by the FBI.
This was very bad for Bitcoin, and some governments have tried to ban Bitcoin for this reason. It is the biggest example of how Bitcoin can be abused, although, crime can happen with all currencies.
How do I buy Bitcoin?
You know how does Bitcoin work, what it is, what it’s good for and what it’s bad for. The only thing left is to know how to buy it. So, how do you buy Bitcoin?
There are three main options.
This is the simplest way, but you normally must use your identity. This means using your name, address and a passport/driving license. Fees for broker exchanges normally cost between 1-5% but it depends on your location on how you pay.
The good thing is, you can pay using bank transfer, debit/credit card, and even PayPal. I recommend Coinbase because it’s easy to use, reliable and you can use PayPal. If you don’t live in Europe, Australia or North America though, I recommend Coinmama.
Using a broker exchange is a bit like when you go to a travel agent to convert your local currency into a foreign currency (like USD for JPY, for example). However, with Coinbase and Coinmama, etc., the broker is converting your local currency into Bitcoin.
P2P (Peer-to-Peer) Exchanges
These are like broker exchanges, but they don’t use a middleman — there is no broker. For example, John can send money to Amy, and Amy will send John some Bitcoin. There is no broker, so they pay no fees!
Amy will always have to pay John the Bitcoin because P2P exchanges use an escrow service. When John asks Amy for the Bitcoin, the Bitcoin is sent into the escrow. When John pays Amy his money, the escrow sends John his money. John and Amy have no control over the escrow, so it is always fair. And fair trade is one of the essentials on understanding how does Bitcoin work.
Some sellers on P2P exchanges will ask you for ID, but some sellers won’t. So, it is possible to use P2P exchanges to buy Bitcoin anonymously. You can even pay in cash (paper money)!
You can also pay with bank transfer! I recommend using the LocalBitcoins.
This is the least common way to buy Bitcoin. There are not many Bitcoin ATMs in the world, so you will have to use this map to see if there is one near you. If there is, you can go to it and buy your Bitcoin using cash, but the fees are expensive — 5-10%.
To learn more about Bitcoin ATMs, P2P exchanges and broker exchanges, read our How to Buy Bitcoin guide. In that guide, I give you full instructions on setting up your wallet, verifying your identity and buying Bitcoin with each payment method.
The invention of Bitcoin is only the beginning. Some people are using Bitcoin and other cryptocurrencies instead of banks, but it still hasn’t completely replaced banks. What are your thoughts? Do you think that Bitcoin will replace banks? Or does it need to improve first?
By answering the above questions, you can test what you have learned in this guide. You can also try to answer the question “how does Bitcoin work?” in just three sentences. Try it — it’ll help you remember what you’ve learned. Post your answer in the comments!
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